Canary Wharf owner Songbird slips on £140m fundraising

Songbird, the property company behind London's Canary Wharf, has seen its shares subside a little after it announced a £140m fundraising.

It has proposed an open offer to shareholders - backed by its major investors such as Qatar Holding and China Investment Corporation - to repay a £135m facility due to expire today (but extended to allow enough time for the fundraising to complete). The £135m loan from shareholders was put in place as part of a fundraising last year. The issue price for today's 1 for 6 open offer is 128p a share, and in the market Songbird has slipped 11p to 147p.

At the same time the company said the market value of its portfolio rose by 4.3% during the six months to the end of June to £4.78m, with a 6% rise in net asset value to 178p a share. It said the administrator to Lehman Brothers stopped paying rent during the period, but it had an arrangement with insurer AIG to cover any shortfall for a period of four years.

Commenting on the fundraising Michael Burt, an analyst at Execution Noble, said:

In short, not a compelling deal and an expensive means of refinancing the £135m shareholder loan. However, the pricing at a 25% discount to pro forma net asset value merits take-up by shareholders.

We have viewed this [£135m] loan as an overhang since the fundraising last year and although removing it does clean up the corporate structure somewhat by removing any borrowings at a Songbird level, a 4.5% dilution to net asset value is an expensive price to pay. The £5m expenses of the open offer are equivalent to 3.7% of the loan amount, which is expensive relative to the 2% we would expect a company to pay by refinancing debt into a new facility.

Despite our reservations over the transaction, the pricing is attractive enough to warrant shareholders following their rights. We remain of the view that the company's low free float and complicated capital structure (minorities outstanding in Canary Wharf, warrants to major shareholders, pre-emption rights over dividends for preference shareholders) merit a discount to net asset value of around 15%-20%. However, we believe that the valuation should be based off the net asset value inclusive of the Lehman Brothers rental guarantee, suggesting a medium-term trading range of 155-165p.

Over at KBC Peel Hunt analyst Keith Crawford said:

The [offer] is being priced at a significant discount, and compares adversely to other recent issues such as Development Securities which was completed at around 10% discount. The choice of equity to replace debt again is another cold dose of reality. The core club of private shareholders, 70%-75% of the register, will undoubtedly back the issue.

News flow from Songbird/Canary Wharf in the period has concentrated on letting activity with the company announcing a number of lease restructurings/re-gearings for Barclays, the FSA, etc as well as attracting new tenant Shell which has committed to 187,000 square feet of space at 40 Bank Street at an effective rent of £28.75 per square foot.

The real coup though detailed in today's result was the letting and subsequent crystallisation of profit from the sale of Drapers Gardens. This was the company's debut development in the City and it has usefully exited the investment on a 5.2% yield versus average city office initial yield of 5.4%. Although Songbird's share (around 20%) of the profit in the scheme is immaterial to the earnings/net asset value, it should prove a catalyst for the company to seriously consider further City developments, such as a possible joint venture investment in Land Securities' 690,000 square foot 'Walkie Talkie' office scheme.